GSE reform: “Fixing” what worked

With Fannie Mae and Freddie Mac in government conservatorship, Congress has put several plans on the table to “fix” our system of housing finance. But one good idea hasn’t gotten much traction yet: simply take Fannie and Freddie out of conservatorship and ensure that they have sufficient capital reserves and are properly regulated.

Fannie Mae and Freddie Mac, also known as the government-sponsored enterprises (GSEs), have played a valuable role for decades in helping people to become homeowners and enter the middle class. Nonetheless, there has been a real rush in Washington and in Congress to discard them and eliminate the affordable housing goals, which have helped so many Americans gain access to credit and affordable rental housing. This would be a monumental mistake. The consequences would be grave for working Americans, the housing market, and economic opportunity for many low-to-middle income families if the affordable housing goals were wiped out.

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In his State of the Union address, President Obama focused on the importance of upward mobility and opportunities to climb the economic ladder. But troublingly, an Obama Administration official recently stated that they “…support the repeal of the GSE affordable housing goals…” Walking away from the affordable housing goals is walking away from the American middle class. After decades of solid performance creating access and opportunity, why is the Administration pushing away from a system that, with reform, could support the creation of the next generation of homeowners?

The constricted lending environment we are currently experiencing could become the new normal if Fannie Mae, Freddie Mac and the affordable housing goals are eliminated. The New York Times recently wrote that: “…despite the confluence of promising signs, little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market…”

Without the GSEs and the goals, homeownership opportunity could be cut off for many creditworthy borrowers, first-time homebuyers, military families, working-class families and others who benefit from the affordable housing goals.

Who would benefit the most from the dissolution of Fannie and Freddie? The institutions that are most likely to step into their space as securitizers in a new system are large banks, which are sure to be eager for the government guarantee and the profits from the securitization business. Remember, it was Wall Street that caused the housing crisis and the Great Recession, not Fannie Mae and Freddie Mac. No one disputes Fannie and Freddie’s historic role in helping to create one of the strongest middle classes in the world. Few dispute Wall Street’s role in helping to destroy it. Why single out Fannie Mae and Freddie Mac for special punishment and, as a result, curtail opportunities for working people in the process?

What makes sense is to go back to a system that worked for many years with Fannie and Freddie and institute some key reforms to ensure that they are well regulated and have adequate capital reserves. What doesn’t make sense is to throw out the baby with the bathwater and do enormous harm to the prospects of working people.

Taylor is the CEO of the National Community Reinvestment Coalition in Washington, DC.